New Keynesian Monopolistic Competition and Objective Demand

The New Keynesian model of monopolistic competition by Blanchard and Kiyotaki (1987) is reformulated according to an objective demand approach making the behavior of all agents fully rational. The revised model is compared with the original model in terms of prices, quantities and welfare. Working with the revised model enhances the validity of the menu-cost argument and, different from the original model, implies that price rigidity is increasing in market concentration.